Obama wants to stimulate the US economy. Good for him. He's not doing enough - but he's got the Tea Party to deal with.

In the UK we could do so much more with almost limitless cheap borrowing available to us. Last December I laid out a plan with my Finance for the Future and Green New Deal colleague Colin Hines for what we called Green Quantitative Easing. As I wrote then:

'Green Quantitative Easing: Paying for the Economy We Need’ argues that the need to reflate the UK economy has not gone away and that there is an urgent need for action to stimulate the economy by investing in the new jobs, infrastructure, products and services we need. There is no sign that this will happen without government intervention, the report therefore proposes a new round of quantitative easing – a Green QE2.

Green QE2 would use the tens of billions of borrowing do three things,

a. The government would need to invest directly into new green infrastructure for the UK.

b.The government should work in partnership with the private sector, working through a new National Investment Bank, to create new opportunities – and especially green ones – for the UK;

c. The government must liberate local authorities to green their local economies for the benefit of their own communities, and it can do this by providing a capital fund for them to use when working with the private sector on joint venture projects.

These proposals will together inject the money into the UK economy that can kick start economic activity in this country, reinvigorating government, local government, the private sector and household economies and in the process result in a truly greener country.

The final proposal of the report considers tackling the costly government debt incurred during the PFI process. This would be achieved by using the Green QE2 to cancel this £56 billion debt immediately and to pay off the money owed. Future generations of taxpayers would thus be rid of the need to have to pay for the past mistakes in government finances. The sums involved are estimated over the decades to total a staggering eventual cost of £252 billion. The around £200 billion 'saved’ could then at least in part be allocated instead to continue to finance Green New Deal initiatives over the decades to come. There would be no further PFI projects, at present projected to initially cost £13 billion, as building and infrastructure programmes would in future be financed through the National Investment Bank proposed in the report.

1.The banks profited enormously from the programme, which is why they bounced back into profit so soon after the crash – and bankers’ bonuses never went away;

2.The entire government deficit in 2009/10 of £155 billion was basically paid for by the quantitative easing programme.

3.There was a shortage of gilts available for investment purposes as a result of the Bank of England buying so many in the market. Large quantities of funds were invested instead in other financial assets including the stock market and commodities such as food stuffs and metals. This has impacted on inflation, which has stayed above the Bank of England target rate;

4.Deflation has been avoided, although the relative role of quantitative easing in this versus the previous government’s reflation policies is unclear;

5.Interest rates have remained low.

However, one thing has not happened, and that is that the funds made available have not resulted in new bank lending. In fact bank lending has declined since the quantitative easing programme began.

The reports author Richard Murphy stated:

The quantitative easing programme might be considered a short term success, but the report notes that the benefit has been captured almost entirely by the financial services sector, whilst further asset boom and bust cycles are, at least potentially being recreated with resultant risk to the economy. These are undesirable long run outcomes when the real aim is to get the UK economy working again. For that reason the next round of quantitative easing needs to be green and to improve conditions in the wider economy.’

I am still quite sure that this is the programme for recovery the UK needs - and that its use to get rd of PFI for good would also liberate us from massive long-term debt.

I'm speaking at the Green Party conference tonight. It might get a look in.

6 Responses

“The banks profited enormously from the programme, which is why they bounced back into profit so soon after the crash – and bankers’ bonuses never went away”

Unlike the US QE programme, the UK was not intended to assist the banks, which is why it targeted gilt purchases from non-banks. In fact why would any bank want to sell a liquid instrument yielding 3.5% for excess reserves yielding 0.5%, in order to just lose money. The stated idea of QE (aside from the actual reason of cheaply funding the deficit) was to encourage holders of risk free gilts to invest in more risky assets, and drive down the cost of funding in those assets (whether it be corporate debt or equities), improving confidence and hence business investment.

However, one thing has not happened, and that is that the funds made available have not resulted in new bank lending. In fact bank lending has declined since the quantitative easing programme began.

Bank lendng has declined as all the new regulations have redcued the amount available for lending and increased the risk costs. You can get an incredibly cheap mortgage if you have a 30% deposit, but the costs doubles with only a 10% deposit. Unfortunately the banks should have been this risk averse in 2005-2007, and could have been less risk averse now, but as we all know they were predominantly managed by idiots, whilst the regulators at the FSA and BOE weren’t any better.

Banks are forced to hold gilts or reserves as part of the liquid asset requirements, so they would not sell gilts with a significantly higher yield merely to exchange the asset into reserves. The whole point of QE is to target participants that are not required to hold riskless assets in order to encourage take up of more risky assets. But there were probably some bank trading desk that sold trading holdings of gilts, although the movement in the yields over the period of QE was minimal and actually ended higher than they began. So unlikely to have made much out of that.

Where banks would have benefitted would have been through a narrowing of Libor back to base rate, especially those banks who needed liquidity. But this would have happened in a return of stability to the market anyway, and would have been reflected in the pricing on loans into the economy.

It’s quite clear the IMF and the World Bank are enforcing austerity measures to benefit the finance houses and the banks.

They are buying up public amenities at fire sale prices in EU countries while at the same time imposing crippling and impossible-to-pay interest rates on countries such as Greece. It is quite clear that Greece will have no choice but to default.

It has been shown time and time again throughout history that, with our present monetary system of creating money by bank lending, the only way out of debt is to create more debt. You need to spend to create demand and make the economy grow. Why do you think for years banks were encouraging more and more people to take on more and more debt that they probably couldn’t afford? To stimualte the economy by circulating more money and have people buy stuff.

Pretending the economy needs to be treated like an individual household, that is, cutting their debts until they are solvent again, is junk economics. The whole economy runs on debt! Without debt, there is no money!

Like I said before, the country is crying out for better infrastructure, more housing and better piblic transport. We also badly need to start making things again, and create the economic conditions necessary (capital controls, tax relief on productive capacity, restrictions on speculation) to do this. If called for, a degree of protectionism should also be contemplated.

Massively stimulate the economy, create demand for investment in manufacturing and industry that will largely pay for itself and start paying down the deficit in the boom times.

Stevo!!
This, I must admit, is where I have a real problem with you & Richard & your solutions. We got into this mess mainly through banks pushing credit on everyone. How can further increasing that benefit anyone ?
Yes, the alternative will be painful. If you drink a bottle of whisky a day for a fortnight then the hangover will be horrendous. The best way to alleviate it, in the short-term, will be another bottle of whisky. No medical person would suggest that was the best response.
In the end we have to get out of the destructive cycle of consumption & debt NOT keep it going until society collapses or the world stops resourcing it.